Uniti’s Steady and Plodding Business Persisted in Q4

Although Uniti’s UNIT revenue came in at the low end of its fourth-quarter guidance range, we believe anyone disappointed with fourth-quarter results or the 2023 outlook has unrealistic expectations. In our view, the results Uniti delivered and foreshadowed for 2023 are indicative of its potential considering so much of its business consists of its stable lease with Windstream. We maintain that bullish commentary about adding new leases to the firm’s fiber footprint will be insufficient to really move the needle. However, we also think the market has become overly bearish, and considering the financing transactions that Uniti announced, we think fears of default would be overblown. We’re maintaining our $12 fair value estimate but see Uniti as a high-risk stock.

Total fourth-quarter revenue was down 3% year over year, but it was attributable solely to the Uniti Fiber segment, which is often lumpy due to the timing of nonrecurring equipment sales, which carry little margin. While sales in this segment were down by 8% year over year, EBITDA was flat, translating to 350 basis points of margin improvement. We don’t see any change to the fundamentals in the firm’s new fiber leasing, as the firm booked 1.1 million in monthly recurring revenue, or MRR, in the quarter. Management said that for the full year, fiber bookings and installations both set records, at $3.6 million and $3.5 million in MRR, respectively.

Despite continuing momentum in additional fiber leasing, revenue Uniti receives from Windstream still makes up about 70% of Uniti’s total sales. Given our expectation that sales from Windstream will grow only about 2% annually throughout our 10-year forecast, we see little opportunity for total sales to grow more than the low to midsingle digits each year. However, there’s also virtually no chance that Windstream sales will decline unless Windstream breaks the lease, and with nearly 100% Windstream margins, operating performance will be predictably stable.